Sunday, 23 May 2010

Bets stack up against the Euro

Hedgies are reported running big short Euro positions. Shorting anything denominated in Euros, equities, corporates or sovereigns is now the biggest game in town and some hedge funds have already reported large profits from this trade. Japanese funds have sold their entire holdings of Greek bonds but who were the buyers? There are now a net imbalance of 100000 contracts on the US futures markets betting the Euro will fall. Only the ECB seems to be a buyer. Its all like the 92 Sterling crisis.

The problem was encapsulated by a story in the press of an out of work Spanish marketing executive whose only work offers were from the black tax evading economy. That is the Club Med problem. Tax evasion is an accepted way of life. Is it any wonder that their government finances are in the red?

It now appears Merkel's ban on short selling in Germany was motivated by political necessity to get her aid package through the German lower house by 7 votes! If the Greeks start invoking the German guarantees the German electorate will bring Merkel's government down.

Everyman and his dog, Hannan, Booker etc, seems to have a piece in the weekend press dealing with the Euro's problems. The best by far was Chris Meyer, wearer of red socks and former UK ambassador to Bonn and Washington's essay in Saturday's Daily Mail entitled "Death of the Euro?". Meyer rightly points out what was widely known in UK government circles in 1972 that the driving force behind the ECC or EU as it became was European political uniion. Even I, a lowly oik in the Civil Service at that time knew that but of course we were all gagged by the Official Secrets Act.

Meyer then goes on to describe the care with which Kohl, the German Chancellor in the 90s took in selling the Euro to the German electorate. Kohl knew the Euro project could be blown apart by the profligacy of the Club Med countries. Meyer reports Kohl went wobbly on the whole Euro business for electoral reasons in 97, two years before the Euro launch in 99, and wanted a postponement. The German finance ministry knew that Euroland economies should be liberalised and reformed before the launch of the Euro and not as happened, propelled by the 'ever closer union' clause in the 1956 Treaty of Rome, launch the Euro and hope it would produce reform in Club Med. Cart before the horse springs to mind.

Meyer recalls going to a public meeting in the Rhineland where Kohl though he was speaking to an entirely German domestic audience where Kohl claimed the Euro was the best way for Germany to dominate Europe without reawakening fears of German domination.

Germany since Bismark in the last 1890s has always exported far more than it imports. The same is true today. Germany sells its desirable goods to Club Med and sucks the money out of these countries. These funds were being recycled into the Club Med property market but that has now hit the buffers. The unpalatable truth for Merkel as Kohl realised 15 years earlier was that Germany has no choice but to prop up Club Med in the Euro but how is this to be done without alienating the German voter?

After the Franco Prussian war of 1870 with the usual defeat of France European statesmen started to talk about the German problem. For my money it started a bit earlier in 1815 when the Prussians were the critical element at Waterloo in the defeat of Napoleon. Things then went on the back burner for the next 50 years whilst Bismark got on with unifying the German states under the Kaiser into modern Germany. The real politik of the European situation then emerged. Germany is a huge country with no natural boundaries in the East, a hard working industrious obedient people, and a manufacturing economy dominant in Europe.

Its the same German problem that Europe now faces. The French know they cannot handle it alone and soon they will be sucking up to us in the UK to provide a counter balance to German might in Europe. I say leave leave them to the Germans. My family and every other family in the UK in the first half of the 20th century lost far to many sons and wealth helping out France and Belgium against German might. Let us not make the same mistake in the 21st century and let us hope our government resists the siren calls to bail out the Euro as it is 'in our interest'. It is not in our interests as it was not in 1914 to send our army to help France.

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